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Failing to serve... and failing to notice failure to serve

The High Court has refused to set aside a consent order agreed between a landlord and a former tenant in respect of a rent arears claim. In this case, the landlord had failed to serve an appropriate notice under section 17 of the Landlord and Tenant (Covenant) Act 1995 (“the Act”) to require payment. Section 17 of the Act stipulates that a former tenant shall not be liable to pay any sums under an agreement or covenant with the landlord, unless the landlord serves upon it, within six months of the date that the charge is due, a notice stating that the landlord intends to recover the sum with interest. Although the original tenant failed to realise this at first, the consent order providing for payment to be made was upheld.

The facts

The appellant (“the Original Tenant”) was granted two leases of restaurant premises in Windmill Row, London by the respondent landlord (“the Landlord”). The Original Tenant traded from the premises until he sold his business and assigned the leases to the buyer. In doing so, he guaranteed the buyer’s obligations to pay rent to the Landlord, pursuant to an authorised guarantee agreement (“AGA”). When the buyer’s business subsequently failed, a guarantee claim was issued against the Original Tenant by the Landlord. However, this claim was not preceded by the service of any notice by the Landlord under section 17 of the Act.

The Original Tenant instructed solicitors to defend the Landlord’s claim. However, although they settled the case on his behalf, they failed to notice that a section 17 notice had not been served by the Landlord. Had the solicitors noticed, the Original Tenant would have had a complete defence against payment under the guarantee, as service of a section 17 notice is a mandatory requirement of the Act when a landlord pursues such a claim.

A consent order was approved by the Court without a hearing, pursuant to which the Original Tenant was required to pay £36,356.90 to the Landlord. However, the Original Tenant then instructed new solicitors, who noticed the Landlord’s mistake. The Original Tenant therefore issued fresh proceedings, arguing that the consent order was void and should be set aside, an argument which was rejected in the County Court at first instance.

The appeal

Appealing the county court’s decision, the Original Tenant argued that the consent order was void on two grounds;

service of a section 17 notice was a jurisdictional requirement, and the Landlord’s non-compliance meant that the original judge did not have the jurisdiction to approve the consent order requiring the Original Tenant to pay; and

the consent order was void pursuant to section 25 of the Act, which provides that an agreement relating to a tenancy is void, to the extent that it excludes, modifies or otherwise frustrates the operation of another part of the Act (in this case section 17). The Original Tenant claimed that there was no material distinction between the consent order and a hypothetical clause in an AGA which might provide that landlords did not need to serve a section 17 notice, in order to recover the fixed charge from the tenant.

The decision

On appeal to the High Court, the Original Tenant’s arguments were rejected.

On the first ground, the High Court held that although section 17 did identify the ingredients in a cause of action for recovery of the rent, this did not render compliance a pre-condition of the Court’s jurisdiction to make a consent order. It was held that it would be contrary to public policy to undermine the Court’s power to “bless” agreements to settle litigation.

Regarding the second argument, the High Court held that the fact that the settlement provided for payment of a sum of money for which the Original Tenant would not have been liable had an available point been taken in the litigation, could not be equated with an agreement to contract out of section 17 of the Act, and therefore could not be considered an agreement which had the effect of excluding, modifying or otherwise frustrating section 17 either directly or indirectly.

The High Court therefore dismissed the appeal.

Why does it matter?

This case highlights the importance to landlords of following the statutory requirements regarding the service of section 17 notices. For the avoidance of doubt, landlords wishing to seek sums liable from a former tenant pursuant to an AGA should serve a section 17 notice on the former tenant within six months of the date that the arrears first became due. A landlord should never simply hope that the tenant fails to spot the lack of service of such a notice.

This case also clearly demonstrates that the onus is on a party’s solicitors to ensure that any potential argument and/or defences have been identified before settling a claim. It will be very difficult to argue that a case should be appealed because a party’s solicitor failed to spot something that should have been self-evident. This is also consistent with the court’s general reluctance to open up settlement agreements which should bring finality to disputes.

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